Carillion: part 2

The Carillion collapse will rumble on and on. In many cases like this, the first action is for the company to go “into administration”, with an appointed administrator tasked with finding ways of selling those parts of the operation that can be salvaged and getting as much value back as possible.

In Carillion’s case, however, the fact that the business went straight into liquidation rather than administration shows that there really wasn’t much left worth salvaging. I asked this last week and I’m not much clearer on the answer now – how is it possible that a business of that size and with that far a reach, was in such a state that liquidating the assets was the only way forward?

There’s been much said in the press about the low margins that Carillion was operating on, about the ridiculously low tender prices that they went in with. A colleague’s father, who works for another large contracting firm, said that his organisation lost out to Carillion on a big job because the latter’s tender price was way, way below what the former could even consider going in at. That’ just on one biggish job in the south-east. Replicate that across the country and across the sectors that Carillion got involved in and the reason why becomes so much clearer.

Most merchants who are affected by the dealings they had with Carillion directly will be covered by credit insurance, the dark days of 2007 when the likes of Euler Hermes ran screaming from anything to do with construction having passed. However, the knock-on effects on Carillion’s many, many sub contracted businesses will have repercussions for merchants.

The jobs that Carillion has left unfinished will get completed somehow, by someone. We have to hope that those who pick up the pieces are heeding the warnings and learning from some of Carillion’s mistakes. One would expect the costs of projects to rise as companies realise that there is no sustainable business to be had from working on Carillion’s margins. In many cases, that will happen. However, there is anecdotal evidence of contractors swooping in on developments, anxious to hoover-up the Carillion crumbs – Construction News mentioned it just this morning.

This is now the time to reassess what prices are paid for contracts, to recognise the value that each element in the supply chain is adding and reward it accordingly. It really shouldn’t be a chance to continue tendering at the lowest possible price, just to ensure you get the business over a rival. Otherwise we’ll never get out of this mess.